Bonds flat on steady policy message from Fed's Yellen

The bond market traded in a narrow range on Tuesday, absorbing Federal Reserve Chair Janet Yellen's message that the U.S. economic recovery remains incomplete and early signs of a pick-up in inflation are not enough to accelerate anticipated interest rate increases.

Yellen's testimony before the Senate Banking Committee generated little market movement, with prices gyrating a few points above and below the day's opening level, reflecting market views that the loose monetary policy stance was not about to change.

Despite strong recent jobs reports and other signs of continuing recovery, Yellen emphasized she won't conclude the economy has recovered until wages start rising and discouraged workers return to the labor force.

"One small nuance change was her recognizing the labor market performance was better than expected. It is not a hawkish shift in tone, but it is a recognition that the labor market data had been better than they anticipated at the June meeting," said Michael Pond, global head of inflation market strategy at Barclays in New York.

Yellen's projections on Fed rate hike

Federal Reserve Chair Janet Yellen discusses the timing of the first Fed rate hike. Yellen says there is no formula for when the first rate increase will occur, it will depend on the progress of the economy.

"We think over time the labor market data will continue to improve and wages will pick up, leading to the Fed tightening cycle and market rates rising with that. But until we get the Fed acknowledging a pick-up in wages, the market will just take its time adjusting rates higher," said Pond.

Ahead of Yellen's testimony, which will continue for a second day on Wednesday before the House Financial Services Committee as part of a semiannual monetary policy report, data showed a smaller-than-expected rise in June U.S. retail sales.

June's data included a surprising decline in receipts at automobile dealerships, but not enough to knock the perception the economy is in recovery mode.

Retail sales rose 0.2 percent in June after an upwardly revised 0.5 percent advance in May, the Commerce Department reported. Economists polled by Reuters had forecast retail sales, which account for a third of consumer spending, to advance 0.6 percent..

"The people that were poised for retail sales to shake things loose got an OK report, and certainly the upward revisions were supportive of higher five-year yields," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

Yellen did send a shock wave through portions of the equity markets. She cited unease about some aspects of the U.S. securities markets, taking the unusual step of singling out biotechnology and social media stocks for their "stretched" valuations.